How billionaire investor Ray Dalio built all-weather portfolio for his family

Bears have been reigning over stock markets around the world recently as the war between Iran and US-Israel sparked a rally in oil prices, with Dalal Street being no exception. As investors panic about the bloodbath in markets, American billionaire Ray Dalio shared how investors can build a well-diversified ‘All Weather Portfolio’ that can be valuable during tough times.

Dalio, who founded one of the world’s largest hedge funds, Bridgewater Associates, took to X to pass along the investment principles that he learnt over the last 60 years. According to him, the most important thing for investors is to have a portfolio that is well diversified, can deliver the highest possible return with the least amount of risk, and does not require market timing.

Why investors should have all-weather portfolio

Dalio cited two reasons why investors should build such a portfolio. He explained that most people consider investments in cash, such as short-term government debt or nearly default-free analogous interest-bearing deposits like high-quality money market funds, to be the safest. However, these cash investments will certainly give the lowest after-tax returns over time, and they will lose a lot of purchasing power in periods of high inflation, he said.

Another reason is that almost all investors, including most well-established professional investors, cannot time the market effectively even when they think they can. “For that reason, I believe that for most investors managing their own portfolios, investing should be done with little or no market timing,” Dalio wrote.

Unlike most portfolios like the 60/40 stock-bond mix or investments that perform badly in times like now, Dalio’s all-weather portfolio is a passively held mix of investments that is expected to have a return that is much higher than that on low-risk assets like cash, but with much less risk than higher-risk assets like stocks and bonds, in any environment.

“About 30 years ago, I was trying to create a strategy that my family could use to invest without my guidance after I was gone. I believed that I needed a portfolio that a) would deliver a significantly higher return than cash (i.e., equal to or above the classic 60/40 stock and bond portfolio), b) would have less risk than the 60/40 mix, c) would not be exposed to doing badly in any particular type of economic environment, and d) would not require market timing,” the American billionaire said.

How to build an all-weather portfolio

Dalio explained that the only way he could get this all-weather portfolio was by holding diversifying, higher-returning, higher-risk investments that together would have the same higher returns with lower risk than any of them would have individually because of how these asset classes would diversify each other.

He came up with the concept of “risk parity”, which refers to the strategy of taking investments of different risks in order to balance them out. “I then balanced my exposures to each asset class based on the most fundamental drivers of its returns. In other words, by knowing how each asset class responds to changing economic conditions like inflation and growth (e.g., bonds do badly when inflation and growth rise, while inflation-hedge assets like gold, inflation-indexed bonds, and commodities do well) and having equal amounts of risk in rising and falling inflation and growth environments, I could create a passive strategic allocation mix that would be well balanced for all economic scenarios,” he said.

Dalio said he built this approach with his Bridgewater team. Irrespective of whether investors themselves implement this strategy or hire someone else to build such a portfolio, the billionaire wants people to understand how the ‘All Weather portfolio’ works and be confident about how they can “have good returns without being exposed to unacceptably bad performance in what most people think are bad market or economic environments”.

Bloodbath on Dalal Street

This comes as Sensex and Nifty saw a sharp selloff recently, falling around 10% each in one month as the war between Iran and US-Israel sparked a rally in oil prices, pushing them beyond the $100 per barrel mark for the first time since Russia’s invasion of Ukraine in 2022.

The sharp selloff on Dalal Street has wiped off more than Rs 48 lakh crore so far in March from the total market capitalisation of all companies listed on BSE, dragging it down to Rs 415 lakh crore by the end of the trading session on Monday.

Markets have recovered partially today, with Sensex rising over 1,200 points and Nifty nearing 22,900 in the afternoon after US President Donald Trump said that the US and Iran have had very good and productive conversations over the last two days regarding the “complete and total resolution” of the rising hostilities in the Middle East.

However, experts advise caution as the overall market sentiment remains negative. Foreign investors have been on a selling spree on Dalal Street. FIIs net sold Indian equities for the 17th consecutive session on Monday, net selling equities worth Rs 10,414 crore, according to NSE data.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)